Stifel is incrementally more positive on their outlook for the defense industry following a National Security Post-Election Analysis event yesterday. The panelists' believe that the administration will be inclined to put additional dollars towards modernization. However, the panel shot down expectations for an immediate and significant increase in defense spending in 2017 and 2018. The general belief is that the Budget Control Act would remain law through 2021, with Congress opting for an agreement similar to the Murray-Ryan compromise. A similar agreement would lift sequestration caps and permit an increase in defense spending. Also handicapping a rapid increase in near term spending is the fact that the Pentagon has already drafted its 2018 budget, precluding the new administration from making major changes without sending the whole budget back to the drawing board.

Stifel analyst Joseph DeNardi commented, "We attended the National Security Post-Election Analysis hosted by Bloomberg Government & NDIA yesterday to get additional insight into what a Trump administration will mean for the defense industry. From the get-go, there was tacit admission from the panel of experts that there isn't much in the way of a detailed policy on national defense from President Trump's. Nevertheless, the panel did reveal some interesting insight as to how one of the apparent conflicts in Mr. Trump's defense spending plan will be resolved - that is, Mr. Trump has signaled his intent to increase both modernization spending and the size of the active Army. Accomplishing both will be challenging and we see him favoring modernization over a troop build up, in the end, a view the Bloomberg/NDIA panel also shared."

Mr. Trump's voiced plans to rebuild the Army back to the 540,000 troop level would likely cost in the $30B-$50B range based on what that troop level has cost in the past. The DoD has concerns that such a high end-strength level can lead to a "hollow" force if funding for modernization to support it can't be sustained. Stifel believes that a more favorable option would be to increase modernization spending. This spending would mostly benefit the Air Force and Navy, more so than the Army.

Companies that may benefit from spending initiatives in the Air Force would be those similar to Lockheed Martin Corporation (NYSE: LMT), and Northrop Grumman Corporation (NYSE: NOC). Global security and aerospace companies that have histories working with the U.S. government.

Both Huntington Ingalls Industries (NYSE: HII), and General Dynamics Corporation (NYSE: GD) have extensive experience building Naval ships and submarines for the U.S. Navy, and are most likely to benefit from any additional government spending in this area.

Joseph W. DeNardi noted, "To the extent that Mr. Trump accelerates the current offensive campaign to accomplish his promise of "destroying" ISIS, we would expect this to result in a further increase in demand for missiles (RTN) rather than a large deployment of troops. Based on their DoD customer exposure, we still perceive Lockheed Martin (NYSE: LMT) (Buy) and Raytheon (NYSE: RTN) (Buy), followed by Northrop Grumman (NYSE: NOC) (Hold), as being the best-positioned names to benefit from the incremental spending increase that will likely occur over the next few years."